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How Corporate Actions Affect Your Options

How Corporate Actions Affect Your Options

It’s not always clear what happens to your options position when the underlying stock executes a corporate action, so we’ve created this guide to walk through what you can expect.

Overview

  • If you own options on a stock that executes a reverse stock split, a merger, or a spinoff, you’ll notice a few things:

  • The stock ticker will have a number added to it. For example, if you own an options contract for ABC, after it executes a reverse split, it will appear as ABC1.

  • You won’t be able to see this new ticker in the app unless you owned the option before the corporate action.
  • You won’t be able to buy this new ticker (ABC1), but if you own it as a result of a corporate action, you can sell or exercise the options contract.

  • Any stocks we hold as collateral for your options position will also undergo the same corporate action.

Mandatory Corporate Actions

Here’s what will change about your contract after the underlying stock executes a mandatory corporate action.

Special Cash Dividend Payment

If the underlying stock for an options contract you own pays a special cash dividend, the strike price for the options contract will decrease by the cash dividend amount.

Example

If ABC pays a $0.50 special cash dividend, and you own a contract with a $10 strike price, the new strike price will be $9.50.

  • The symbol, expiration date, and the number of shares in the contract won’t change.
  • The option won’t stop trading in the market.
Trade Halt and Liquidation
  • If the underlying stock for an options contract you own liquidates and stops trading in the market, the shares that make up the contract will turn into the cash-per-share amount the company allocates. This means that the contract will be worth 100 times the amount per share the company decides to pay out.
  • The symbol and strike price won’t change, but the OCC will accelerate the expiration date for everyone who owns options contracts on the stock.
  • You’ll only be able to sell your options position. You can’t buy additional options contracts on a stock that’s liquidated.
Stock Merger
  • If the issuing company for the underlying stock executes a stock merger, the options contract ticker will have a number added to it.
  • You won’t be able to see this new ticker in the app unless you owned the option before the corporate action.
  • You’ll only be able to sell this options position because you can’t buy additional options contracts on a stock that’s been acquired.
  • The strike price and expiration date won’t change, but the number of shares in the contract will change depending on the terms of the merger.
Cash and Stock Merger
  • If the issuing company for the underlying stock executes a cash and stock merger, the options contract ticker will have a number added to it.

  • You won’t be able to see this new ticker in the app unless you owned the option before the corporate action.

  • You’ll only be able to sell this options position because you can’t buy additional options contracts on a stock that’s been acquired.
  • The strike price and expiration date won’t change, but the number of shares in the contract will change depending on the terms of the merger.

Note: The OCC releases the new cash portion of your contract 2 - 3 weeks after the corporate action is processed. This may affect your account if you exercise your options contract or if you’re assigned well before the expiration date.

Example

If you own an options contract for ABC, and ABC merges with DEF, after the merger your new ticker will be DEF1.

Ticker Change
  • If the underlying stock for an options contract you own executes a ticker change, the ticker on the options contract will change to reflect the new ticker on the underlying stock.
  • The strike price and expiration date won’t change, and the options contract will continue trading in the market.
Reverse Split
  • If you own options on a stock that executes a reverse stock split, the new options contract ticker will have a number added to it.

  • You won’t be able to see this new ticker in the app unless you owned the option before the corporate action.

  • You’ll only be able to sell this options position because you can’t buy additional options contracts on a stock that’s gone through a reverse split.
  • The strike price and expiration date won’t change, but the number of shares in the contract will decrease depending on the terms of the reverse split.
Example

#1 If you own an options contract for ABC, and ABC executes a reverse split, after the reverse split your new ticker will be ABC1.

#2 If ABC executes a 1:5 reverse split, the number of shares in the contract will decrease from 100 to 20.

Forward Split
  • If you own options on a stock that executes a forward split, the ticker and expiration date will remain the same, but the strike price will be divided by the forward split multiplier.

  • The number of shares in the contract will stay the same, but the number of contracts you own will increase by the forward split multiplier.

  • The option will continue to trade in the market.

Note: If the forward split doesn’t result in a round number (i.e. 5 for 4, or 3 for 2), the rules are a little different:

  • For example, if you owned 3 ABC Call options, after ABC executes a 5 for 4 forward split, you’ll still own 3 ABC Call options, but the underlying deliverable for each contract will be 125 shares of ABC instead of the previous 100 shares.

  • The expiration date, strike price, and number of contracts will remain the same.

  • The number of shares in the contract will change to accommodate the new quantity.
  • You’ll only be able to sell this options position because you can’t buy additional options contracts on a stock that doesn’t result in a round number of shares after the forward stock split.
Example

#1 If ABC executes a 2 for 1 forward split, the strike price will be divided by 2. So if the strike price was $100, the new strike price will be $50.

#2 If you owned 3 ABC Call options, after ABC executes a 2 for 1 forward split, you’ll own 6 ABC Call options.

Stock Dividend
  • If you own options on a stock that pays a stock dividend, the number of shares in the contract will increase by the dividend amount, while the strike price will decrease by the dividend amount.

  • If you own options on a stock that pays a stock dividend, the new options contract ticker will have a number added to it.

  • The expiration date on your contract won’t change, but you won’t be able to see this new ticker in the app unless you owned the option before the corporate action.

  • You’ll only be able to sell this options position because you can’t buy additional options contracts on a stock that’s paid a stock dividend.
Example

#1 If your ABC 100 Call option pays a 3% stock dividend, your new contract will contain 103 shares, and the strike price will decrease by 3% to $97.

#2 If you own an options contract for ABC, and ABC pays a stock dividend, after the stock dividend your new ticker will be ABC1.

Spinoff
  • If you own options on a stock that executes a spinoff, the number of shares of the original stock in the contract will remain the same. In addition to the original shares, the new shares paid out by the issuing company will be added to your contract.
  • If you own options on a stock that executes a spinoff, the new options contract ticker will have a number added to it.

  • The expiration date on your contract won’t change, but you won’t be able to see this new ticker in the app unless you owned the option before the corporate action.

  • You’ll only be able to sell this options position because you can’t buy additional options contracts on a stock that’s gone through a spinoff.
Example

If you own an options contract for ABC, and ABC executes a spinoff, after the spinoff your new ticker will be ABC1.

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